Tax Messenger. Court Case regarding the Recognition of Income from Sales where Gift Cards Are Used. Tax Edition

Transcription

1 26 April 2017 Tax Messenger Tax Edition Court Case regarding the Recognition of Income from Sales where Gift Cards Are Used EY s Russian Tax & Law practice was named a leading Tax firm in Russia in World Tax 2017, an annual guide published by the International Tax Review. On 21 December 2016 the Arbitration Court of the Moscow District issued Ruling No. F /2016 on Case No. А40-789/2016, in which it supported the tax authority s view that Media-Markt-Saturn ( the Company ) had improperly reduced sales revenue by the amount of the credited value of gift cards on the grounds that customers were not granted a discount on promotional products at the time when the gift cards were issued but were granted the right to claim that discount on making a subsequent purchase 1. The tax authorities discovered in the course of an on-site tax audit for that the Company had during that period issued gift cards to customers purchasing particular domestic appliances included in a promotion. Holders of gift cards could redeem the face value of the cards against their next purchase of a product at the Company s stores. 1 The trial and appellate courts likewise supported the tax authority s position. The case is now closed the Company decided not to file a cassation appeal with the Supreme Court.

2 The Company treated the credited value of a gift card as payment received in advance for a future purchase, and at the same time as a discount on the product purchased in the promotion. On that basis, the Company reduced revenue from the sale of the product included in the promotion by the amount of the face value of the gift card at the time of issue. When a purchase was made using the gift card, the Company recorded revenue from that sale in the full amount. The tax authorities challenged the Company s approach to the recognition of income upon issuing gift cards and increased the Company s income from the sale of goods included in the promotion by the total value of gift cards issued in the period concerned and the corresponding amount of profits tax. The Company was also ordered to pay a fine and penalties. The tax authorities took the view that the receipt of a gift card may be treated as advance payment for a future purchase when a purchaser has independently expressed the wish to acquire such a card for use in purchasing goods in the future. In the case concerned, the gift card was received under a different legal premise, with the customer effectively being granted the right to a discount on a future purchase without any advance payment being made. The courts agreed with the tax authority s position, concluding that the Company had not granted the customer a discount on the promotional product by issuing the gift card, but that the entire sum of money received from the customer constituted revenue from the sale of the promotional product. The courts therefore concluded that the premature reduction of revenue by the value of a gift card before the card was actually used resulted in the incorrect recording of income and the understatement of profits tax for the relevant tax period. The courts analysed the marketing policies, the promotion rules, information materials, the general terms of use of Media Markt gift cards, the store s official website and the relevant provisions of civil law and presented the following arguments in support of their conclusion: customers did not purchase the gift card, but received it as a gift and only on condition of making full payment for a specific product included in the promotion; customers actually received a discount in the form of a reduction of the price of a product at the time of presenting the card for redemption, rather than at the time of receiving the card; there was no intention on the part of purchasers of promotional goods to make advance payment for future supplies, and they did not view the gift cards received as prepaid payment instruments; customers were not entitled to use the gift cards to receive a cash refund; information contained in the till receipt indicated not the granting of a discount on a promotional product but the issue of a free gift card to the customer; the condition requiring the customer to purchase a second product and present the card in order to obtain a discount on the first product is legally inadmissible. The adverse ruling on this case may be an indication that companies that use this kind of marketing method face potential tax risks associated with the misstatement of the tax base for profits tax. It should be pointed out that the tax authorities have been paying greater attention in recent times to the treatment of sales transactions involving the use of various kinds of gift cards. For example, in 2015 the tax authorities successfully challenged a taxpayer s approach to the recognition for profits tax of income from sales of gift cards that were not used during their validity period 2. That ruling was in relation to the treatment of income from the sale of gift cards that customers had purchased of their own accord with a view to making future purchases of goods using those cards. The 2 For more details see the article entitled New position taken by the Supreme Court on the treatment of income from expired gift cards in the February 2015 issue of the Russian Tax Brief. 2

3 taxpayer had accordingly treated the receipt of the amounts concerned as advance payment for future purchases, and was not challenged by the tax authority in that regard. Where people did not redeem the cards or did not make full use of them, the company recorded receipts from the sale of the gift cards as accounts payable and included them in the profits tax base after the expiry of the limitation period. However, the Supreme Court 3 supported the tax authorities view that the unused balances of gift cards should be included in taxable non-sale income after the cards have expired as property received without consideration. In view of these adverse trends in case law, we advise companies that issue gift cards to analyse their policies in regard to the sale of the cards and their approach to the tax treatment of related operations in order to identify and minimize negative tax implications. Author: Dmirti Babiner Vera Martynova Ekaterina Lykova For additional information please contact the authors of this publication: Dmirti Babiner +7 (812) Dmitri.Babiner@ru.ey.com 3 Determination No. 305-KG of the Russian Supreme Court of 25 December 2014 on Case No. А /

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